There are growing expectations that BHP will deliver a verdict on the future of its petroleum business next week as it comes under increasing pressure to cut its fossil fuel footprint.KIM KYUNG-HOON/Reuters
Expectations are growing that BHP Group Ltd. will deliver a verdict on the future of its petroleum business next week, as it comes under increasing pressure to cut its fossil fuel footprint.
The world’s biggest miner has been facing calls to detail how and when it will exit fossil fuels, with activist investor Market Forces filing a resolution on the topic this week for annual meetings in October and November.
BHP’s decision this month to approve US$802-million in development spending on oil projects in the Gulf of Mexico – just days before a new report that issued dire warnings about human contribution to climate change – has only ratcheted up pressure from some investors.
“It’s clear something is brewing,” said Simon Mawhinney, chief investment officer at Allan Gray Australia.
BHP declined to comment on market speculation.
Analysts value BHP’s petroleum business, made up of assets in Australia, the Gulf of Mexico, Trinidad and Tobago and Algeria, at between US$10-billion and US$17-billion. The division contributed 5 per cent of BHP’s underlying earnings of US$14.7-billion in the first half to end-of-December, compared with 70 per cent for iron ore.
Investors are split on their fit within BHP’s portfolio, especially as the company focuses on new economy materials such as copper, nickel and potash.
An exit from petroleum would constitute “a major shift” in BHP’s environmental, social and governance (ESG) credentials and overall strategy towards fossil fuels, Morgan Stanley analyst Rahul Anand said in a recent note.
BHP’s late-life, mainly low-return energy assets in Australia are seen as particularly ripe for a sale amid high oil and gas prices.
“For BHP, if you look at its Australian [energy] assets, if they could exit those in a meaningful way for something approximating value, that would be a good outcome,” said Brenton Saunders, a portfolio manager with shareholder Pendal Group.
Credit Suisse and Citi value the Australian energy assets – including the Bass Strait, Northwest Shelf LNG and the Scarborough gas field – at US$3-billion to US$5-billion.
Woodside Petroleum Ltd. is seen as the most logical buyer as they would boost its free cash flow and increase its stakes in key projects, although not all investors favour such a tie-up given the asset mix and likely need for an equity raising.
Woodside declined to comment.
BHP would also have to take a discount on any sale given some heavy decommissioning liabilities, said Credit Suisse analyst Saul Kavonic, although a sale could boost its ESG rating and attract new shareholders.
“BHP could sell these for discounts but still increase share value though a re-rating on the rest of their business,” he said.
Elsewhere, investors say BHP’s petroleum assets are more attractive.
The most valuable are its stakes in oil fields in the Gulf of Mexico, valued at US$10.4-billion by Wood Mackenzie, which made up about 25 per cent of the company’s 103 million barrels of oil equivalent output for the year to June, 2021.
“The rest of the portfolio, there are parts that are high growth, high returning. They’ve done a lot of work on them and shareholders have had to wear some of the bad times. They are good assets,” said Pendal Group’s Saunders.
BHP is due to deliver its annual results on Tuesday.
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